The Hindu Business Line : Mount Everest: Sell in the market

Tata Tea is making an open offer to the public shareholders of Mount Everest Mineral Water (Mount Everest) at Rs 140 per share to mop up a 20 per cent equity stake in the company. Tata Tea had, in June, agreed to acquire a 24.15 per cent stake in Mount Everest at Rs 140 per share through a combination of purchases from promoters and subscription to a preferential allotment by the latter. The open offer is attractively priced in relation to Mount Everest’s fundamentals. Therefore, shareholders may consider divesting their holdings at this juncture.

Shareholders may be able to book profits on a larger proportion of their holdings if they sell the stock in the secondary market, where it is hovering at Rs 137, marginally below the offer price. Those tendering their shares to the open offer may be able to offload only a part of their holdings; Mount Everest’s public shareholding stands at 66.7 per cent (as of end-September) while the open offer is only for 20 per cent, which is less than a third of the public shareholding.

Business

Mount Everest Mineral Water is a bottler of natural mineral water. The products are retail in the Indian and US markets under the Himalayan brand name. Natural mineral water brands usually command a substantial pricing premium over ordinary bottled water, as the water is procured from a natural source and bottled close to that source without any chemical processing, so that the mineral content is preserved. Though this is a relatively small market in India, it has attractive growth and margin potential.

The bottled water business is largely commoditised, with a large unorganised segment and limited pricing power for players. Natural mineral water, however, caters to a niche market, with significant pricing power, as competition in this segment is mainly from global brands such as Evian. Much of Mount Everest’s sales are to the institutional segment with the hospitality industry being a key client.

Financials

Despite the attractive prospects for the business, the company’s financials over the past five years display an inability to scale up operations. While net sales have risen from Rs 6 crore to Rs 24 crore between FY-04 and FY-07, the company has operated on relatively thin profit margins , with inconsistent profitability at the net level.

The company reported net profits of Rs 1.26 crore in FY-07 and loss of Rs 4 crore in the first half of this fiscal. Its FY-07 EPS was at Rs.0.43; the equity base has further expanded with the preferential allotment to Tata Tea.

Scope for turnaround

With the acquisition of equity stake by the Tata group and the infusion of funds through a preferential allotment, there is the probability that Mount Everest’s operations could be scaled up substantially from the current levels. Tata Tea already has a global presence in the beverages business through its various overseas arms.

With Mount Everest lending it access to a natural mineral water source and a recognised brand, there could be scope for the acquirer to effect a turnaround in the company’s fortunes. However, this process is bound to take some time. Moreover, the price for the open offer already factors in some of the gains that are possible from a scaling up of the company’s operations.

The open offer price values Mount Everest at a market capitalisation of about Rs 495 crore (based on the enhanced equity base), which is about 20 times its annual sales. This appears to be quite a generous price for the company’s current fundamentals.

More Stories on : Open Offers | Recommendation | Tea | Water

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page